“Non-profits can register for GST and claim GST refunds on most of their expenses even if their turnover is below the $60,000 threshold for registration. In many cases non-profit bodies do not pay much GST on their activities.

“In turn, when a GST-registered body sells an asset for which it has claimed GST expenses, it must pay GST on the income from the sale. Inland Revenue has applied this rule since GST was first introduced in 1986.

“Revenue officials have recently been advised of a new legal interpretation of this rule which exposes the tax system to substantial potential losses. For the avoidance of doubt, the Government will legislate to clarify the GST rules.

“The new interpretation suggests that where a non-profit body sells an asset that is not connected to a fee-earning activity, the organisation can claim back the GST on the costs relating to that asset, but does not have to pay GST on its sale. This could also be the case if a non-profit body receives an insurance pay-out on an asset, such as a building. An insurance pay-out is treated as a sale for GST purposes.

“The new interpretation is not consistent with the way the GST rules have been applied and understood in the past. If GST expenses have been claimed by a non-profit body in relation to an asset, GST should apply to the asset when it is sold or there is an equivalent event, such as an insurance pay-out.

“The tax system is based on fairness, and being simple and efficient to operate. The new interpretation threatens those principles and the Government will move to restore certainty.

“Inland Revenue has released an issues paper seeking public feedback on the issue. We want to hear from organisations who currently hold affected assets. Non-profit bodies like charities do marvellous work and we recognise their valuable contribution. But fairness applies to all taxpayers,” Mr Nash says.

The proposed new GST rule will apply from 15 May with a savings provision to preserve the tax positions taken by non-profit bodies before that date.